New Material on the 1920-21 Depression

Jonathan Catalan links to two new videos of Tom Woods expounding on the 1920-21 depression, here and here. I haven't gotten a chance to listen to them yet, but I'm sure the case is similar to past things that Woods has said on it.

Jonathan writes of me "Daniel Kuehn has been a vocal critic of the Austrian history of the Depression of 1920-21 (and will hopefully have something published on the topic soon)". I'm not sure about the likelihood of his parenthetical aside, but I'm hoping! I want to clarify. though, that I'm critical of a common interpretation of the downturn that has been propounded by prominent Austrians and libertarians (namely, Tom Woods, Bob Murphy, and Jim Powell). This is not to say that I think Austrian Business Cycle Theory properly conceived does a bad job of explaining the depression. I actually think ABCT does quite well at explaining this and many other credit-cycle driven, gold-standard era cyclical downturns (a point raised by no less than Barry Eichengreen and Brad DeLong in the past).

The critique of Woods, Murphy, and Powell that I lay out in the paper is two-fold:

1. First, that they get an awful lot of their history wrong, and
2. Second, that they misinterpret the implications of 1920-21 for Keynesianism

The mistakes on this history are wide ranging: their characterization of Fed policy, their characterization of the Wilson Treasury, their characterization of Harding's budget and Harding's role in the downturn, their characterization of Commerce Secretary Herbert Hoover, etc. All three of them engage in some of this, and Tom Woods engages in practically all of it. There was so much of this material that I actually had to cut a lot of it from the final paper and emphasize the second point. What's the most odd is that the right version of the history wouldn't have hurt the Austrian case. The only thing we get out of these distortions is an inappropriate critique of Wilson, an inappropriate lionization of Harding, and an inappropriate critique of Hoover. My feeling is that all three of these men did fairly decently during the crisis and there is no need to distort what they did in an effort to heighten the contrast between them. History is not a morality play and it does not require ideal-types for its telling.

The critique of Keynesianism is a little more detailed. My basic premise is that Keynesianism always has emphases that are unique from the Classics and the Austrian School, but it only really comes into great conflict with the Austrian School under certain macroeconomic conditions. These conditions did not hold during the 1920-21 depression, so it's really not a good episode to use to arbitrate between them. Essentially, both Keynesianism and the Austrian School (each properly understood) would have predicted roughly what we see in the data for the 1920-21 downturn, so while it is a fascinating episode in American economic history, it really doesn't get us that far in terms of economic theory.

Moreover, comparisons between the 1920-21 downturn and the Great Depression are especially bad! First, the macroeconomic fundamentals (mostly dealing with interest rates and wage and price expectations) are not comparable between the two episodes. But besides that, policy didn't really do what Keynesians say it should do in the 30s (despite what vulgar Austrians say), nor did it do exactly what Austrians say it should do (despite what vulgar Keynesians say).

Macroeconomic history is very interesting, but it's often empirically intractable (perhaps that's part of the reason why it's so interesting!). We're always so desperate to have an historical episode that perfectly makes our case. Well, usually we don't have that. The historical record, in my opinion, generally reinforces my Keynesianism - but I have no illusions at all about the fact that it's tough to prove anything with it. The most I can really say is that it is "consistent with my theoretical viewpoint". But I want to emphasize that ABCT highlights some very important macroeconomic processes as well. This is not an either/or question - this is a question of what theoretical framework is the most appropriate for explaining specific circumstances.